The biggest political risks to the world economy in 2019

McCreath: 'No one seems to know what's going on with trade' following the Trump-Xi meeting

Governments behaving badly — with populists and authoritarians flouting the rules and international relations fraying — pose some of the biggest risks to the world economy in 2019.

Bloomberg Economics say the year ahead probably won’t bring the end of the cycle, "but risks are growing and new sources of fuel are needed."

Here’s a look at some of the political flash points that could derail growth next year.

TRADE WARS

If there’s one thing Democrats and Republicans agree on, it’s that China’s rise is a challenge for the U.S. The risks from China include threats to the technology supply chain, Beijing’s military expansion, and the country’s efforts to undermine sanctions on North Korea, according to the U.S.-China Economic and Security Review Commission, an annual report by a bipartisan congressional panel.

On the other side of the Pacific, Xi has staked his reputation on managing China’s rise as a global power. With the two countries apparently locked on a collision course, the biggest risk to the world economy remains the U.S.-China trade war.

Even if the G20 truce holds, the dispute could represent the early stages of a prolonged economic cold war. If U.S. President Donald Trump follows through on threats to slap duties on all imports from China, Bloomberg Economics estimates a hit of 1.5 percentage points to China’s 2019 gross domestic product growth.

That would take growth down toward five per cent, though a major policy response by China would soften that blow.

ITALY

Italy’s populist government is locked in a tussle with Brussels over a planned spending spree, unnerving investors and European Union authorities. Next year could be make or break, not just for the populist administration, but also the EU’s ability to impose budget discipline on member states.

The European Commission said in its annual review of euro area nations’ spending plans that Italy’s budget is in “particularly serious noncompliance” of EU limits.

Tensions between the ruling coalition partners — the anti-establishment Five Star Movement and the anti-migration League — could see the alliance collapse before or after next May’s European Parliament elections, plunging Italy into another bout of political chaos. Even if the government endures, Italy could come under pressure in financial markets. The 10-year yield is already at the highest in more than four years.

BREXIT

Britain’s ruptured political landscape has obscured the nation’s exit path from the EU, with little consensus on how that will be eventually achieved. Amid a fluid situation, the risk of a change in Prime Minister, or government, remains high. A no-deal Brexit could mean British GDP is about seven per cent lower by 2030 compared to remaining in the EU, according to Bloomberg Economics. A Brexit that involves the U.K. staying part of a customs union with the EU would still involve a hit to the economy. Output would likely be three per cent lower by 2030 in that scenario.

DEMOCRAT-CONTROLLED HOUSE

In the U.S., the Democrat takeover of the House of Representatives could cripple Trump’s agenda, opening the way for unfettered investigations into his administration, his presidential campaign and his family’s business empire. That would mean two years of policy gridlock, so forget about additional tax cuts and increased infrastructure spending and brace for periodic bouts of drama and threatened government shutdowns. A Democrat-controlled House could even launch an effort to impeach Trump — though if it went that far, the president’s ultimate fate would rest with the Republican-dominated Senate.

ELECTIONS

Next year will see elections in several major emerging economies, with far-reaching implications for their policy stance and market stability. Argentina, India, Indonesia, South Africa and Nigeria are among those headed to the polls. As Brazil’s recent election showed, strongmen with unconventional platforms continue to appeal. Voters are more keen on sending a message to the establishment than on signing off on more of the same. Of the major developed economies, Canada and Australia face elections, though radical policy shifts are less likely in either country.

OIL

Oil’s losing streak has pushed Middle East politics back into the spotlight. U.S. and Iran relations will be key, as will the direction of OPEC and its allies on any cuts to output. U.S. relations with Saudi Arabia are also under scrutiny. Trump has said he won’t let the murder of U.S-based columnist Jamal Khashoggi jeopardize relations between both countries and has warned reporters that if the U.S. broke with Saudi Arabia, oil prices would "go through the roof."

ASIA'S WATERWAYS

With North Korea halting provocations and pursuing diplomacy, East Asia’s waterways could be the biggest flash point in the region. The U.S. has boosted support for Taiwan and plans to step up freedom-of navigation exercises in the South China Sea, increasing the risk of miscalculation that could spark an incident with China. The East China Sea is also a perennial worry.

BLACK SWAN

"My biggest risk is less to do with a particular country, it’s a wild terrorist attack," Robin Niblett, the director of Chatham House, said in an interview. An attack could take any form, including cyber, with knock-on consequences for the world economy as a major incident could provoke a backlash from governments, Niblett said. While there were 10,900 terrorist attacks in 2017 — killing more than 26,400 people — the number of attacks declined for the third consecutive year, according to the University of Maryland’s National Consortium for the Study of Terrorism and Responses to Terrorism.